Wednesday, November 21, 2007

Ericsson sees weak 4Q sales, shares slide

NEW YORK — Telecom equipment maker Ericsson on Tuesday (Nov. 20) predicted a weak fourth quarter due to tightening U.S. and European demand and unrest in emerging markets, sending its shares down 11 percent.

After issuing a profit warning in the third quarter, the world's biggest maker of mobile-network gear said that sales and margins for the fourth quarter would be at the lower end of a forecast range it had given as recently as last month.

Analysts and investors said they were concerned about the company's ability to monitor the performance of its business and were disappointed Ericsson did not give a clear sign when it would start to see improvements.

"It's not good news," said Leo Schmidt, an equities analyst at insurer Chubb Corp, which owns Ericsson shares. He said investors were spooked by the repeatedly revised forecasts.

"That makes people wonder how much management has control of the business," he said.

Ericsson had said in October that fourth-quarter sales would be between 53 billion and 60 billion Swedish crowns ($8.4 billion to $9.6 billion) and that operating margins would be in the mid-teen percentage range.

Chief Executive Carl-Henric Svanberg told investors that it had since become clear that Ericsson would be hurt by tightening network equipment demand in the United States and Europe, a weakening U.S. dollar and political unrest in some markets such as Pakistan, Bangladesh and Thailand.

"We can see that the U.S. and we can see that Europe is tightening," he said. "There are operators that are clearly downgrading their investments for 2008."

Ericsson said it expected a slight decline in business from networks in Europe where operators involved in mergers and acquisitions are slowing spending on upgrades for high-speed wireless data services such as Web surfing.

"We just assume that we'll have continued disruptions from consolidation," Svanberg said. "We do not think for at least the next year that we will have any major (data) upgrades."

He said that tightening U.S. spending could relate to general economic concerns among operators.

Shares in the Sweden-based company tumbled 11 percent to close at 16 crowns in Stockholm, having fallen as low as 15.92, their lowest since February 2004. Its U.S.-listed shares finished down $3.42, or 12 percent, at $25.11.

MARGINS UNDER PRESSURE

Asked whether Ericsson's board still supported management given Tuesday's news, Svanberg said: "I must say we have in this situation very strong support and good cooperation with the board, so there's no change there."

Ericsson is focused on winning share in emerging markets, where it sees the biggest growth opportunities.

"Whatever you lose in market share you will not regain. Time is of an importance here," he said.

But the comments led at least one analyst to question whether this strategy would put pressure on future profits.

Ericsson's biggest competitors include Nokia Siemens, a venture of Nokia Oyj and Siemens, China's Huawei Technologies Co and Alcatel-Lucent, which had also issued profit warnings this year.

Chief Financial Officer Hans Vestberg told investors he expected wireless network building projects to weigh on Ericsson's margins for the next several quarters. Such projects can take six to nine months, or even up to 12 months, he said.

Svanberg said that "in a perfect world" margins could improve in the second half of next year as the company starts new projects, but his reluctance to commit to a timeframe for improvements worried some analysts.

"It raised more questions than it provided answers," said RBC Capital analyst Mark Sue. "People are still trying to figure out where things might settle."

The double-digit percentage drop in the shares on Tuesday followed a plunge of 30 percent when Ericsson shocked the market with its third-quarter warning. It said it was receiving a greater share of sales from costly network projects and less than it had expected from more lucrative network upgrades.

Within days of the warning, Ericsson replaced CFO Karl-Henrik Sundstrom with Vestberg. It also promised to improve its ability to monitor business conditions and avoid such market shocks in future. (Additional writing and reporting by Adam Cox and Jerker Hellstrom in Stockholm: Editing by David Holmes, Paul Bolding; Editing by Gary Hill)